Aug 25, 2021
You can’t invest successfully over time unless you have a well-defined philosophy and process. The key is finding a process that works and sticking to it day in and day out. So being disciplined is crucial.
It is interesting to note that Ninety One has two of only four managers that have been managing multi-asset portfolios in South Africa for more than 15 years. The longevity of our multi-asset funds are testimony to our investment teams having clear investment philosophies and processes, and remaining disciplined through market cycles.
Being a successful investor is not only about harnessing your intellect and experience. Temperament is incredibly important in fund management because, ultimately, it determines how you behave in difficult circumstances. When you think about any investment decision, the first question you have to ask yourself is: “What edge do I have?” Secondly, you need to consider whether you have superior insight based on the work you have done. And lastly, “Have I seen this before?” You may have deep experience and investment expertise, but maintaining an even temperament is particularly important when you face a situation with a highly uncertain outcome.
During my career I’ve seen how market euphoria can end in tears – which brings me to leverage. When interest rates are low, using leverage may seem like an easy way to make money. However, while leverage may start out as a great servant, it transforms into a terrible master at the onset of a crisis.
If you want to be an active investment manager, spend equal time studying history, economics, psychology and accountancy. While you need a solid knowledge of statistics and financial accounts to value assets, understanding the psychology of markets and investor behaviour is also key to maximising investment success.
On top of that, being a history and economics buff gives you an edge. History helps us make sense of countries’ policy regimes over time and the factors that shape the global macroeconomic environment. The monetary and fiscal policies of the major economies have a material impact on global financial markets. If you don’t understand the history behind certain markets, you won’t appreciate why asset prices don’t always revert to their long-term mean or average level.
Common layman mistakes are falling in love with a stock, sticking to losers for too long and not doing a proper assessment before investing.
I wish I could say that every single investment our team has made in the last 20 years has been a success, but that isn’t the case. You need to accept when you are wrong, know how much money you have lost, and importantly, learn from your investment mistakes.
It is interesting to note that the top ten stocks within our Global Franchise portfolio have contributed 53% of the fund’s outperformance over its entire 14-year track record. The bottom ten stocks have only detracted 17% from the overall performance.1 So, importantly, there is a positive asymmetry – the realised investment gain (reward) is much greater than the realised loss.
You can’t avoid investment risk because then you won’t create any wealth over time. In fact, if you do nothing, your money will lose value because inflation will erode the purchasing power of your hard-earned savings.
For more than 20 years, our Quality investment team has been managing multi-asset portfolios that have the dual objective of outperforming inflation over time and minimising the risk of a permanent loss of capital. We have generated attractive inflation-beating returns for our investors in the Ninety One Opportunity Fund over the long term. Importantly, we have achieved a relatively smooth performance profile by investing in high-quality companies with sustainable earnings, stable cash flows and valuations that provide a floor to potential capital losses.
Another valuable lesson is differentiating between scepticism and cynicism. If you are a cynic on a market or company, you will make mistakes because your view will remain fixed – no matter what evidence is produced. At the same time, if you blindly believe every great ‘investment story’, you will also make mistakes because you need to assess whether those stories are based on facts.
Our investment team is firmly in the camp of sceptics, as opposed to cynics. Healthy scepticism means we keep an open mind on potential investments. We believe that if we have done sufficient work, we should have the opportunity to change our minds. Naspers is an interesting example. We owned Naspers in our portfolios from 2002 to 2007 but sold all the shares on concerns about the ownership structure of Tencent. Even though the structure has not changed, we built a position in Naspers again in 2018, based on attractive fundamentals. We still own the stock today. Despite regulatory headwinds in China, we believe the long-term investment case remains sound.
How do you win in investment markets? You need to be an early ‘cheerleader’ for a contrarian investment idea that, ultimately, becomes more mainstream. We were big SA bond investors in the Opportunity Fund, long before it became more of a consensus view.
We started increasing our exposure in 2016. At the time, the then finance minister Nene was unexpectedly fired and there was deep concern about the sustainability of government finances. However, we believed that the fundamental investment case for government bonds was very attractive compared to other opportunities. The big valuation differential has kept us invested in bonds, and over the last five years, SA bonds have outperformed SA equities.2 Today, SA bonds are more of a consensus view. Essentially, if you find an investment idea before everyone else chases that idea, you are going to be well rewarded.
You can also make money if you have a differentiated view on an asset that very few people own. One such business is mining company Assore. Before it was delisted last year, the company attracted very few institutional investors. However, this owner-managed conservatively run business created a lot of value for our investors over a long period of time.
Markets move through different stages – at times, valuations don’t seem to matter. Eventually though, fundamentals will start driving the broader market again. This leaves investors who own assets that they can’t value very exposed to sharp market corrections. If you own something that you can’t value, you have no idea what the risk of losing money is.
Obviously, shares, bonds and property all deliver cash flows, which make them easier to value. That is why we include them in our portfolios, when there is a good investment case to be made. Currencies are equally important to understand if you want to be successful in investment markets. You can value currencies using models applying purchasing power parity3 and capital flows.
There is no shortage of good ‘storytellers’ in the investment industry. Unfortunately, some ‘fantastic investment stories’ could see an investor lose a lot of money. Many investors have jumped onto the cryptocurrency bandwagon, piling into Bitcoin, Ethereum and many others. It is sobering to note that more than 6000 cryptocurrencies have been created but around 1665 have been abandoned or declared ‘dead’.4 Paycoin, for example, went from 14 cents to $4.50 in 2014 for no apparent reason and went all the way back down to 14 cents again. Investors should take care not to be sucked into the cryptocurrency craze.
You need to understand how to spot Ponzi schemes. These schemes usually have pyramid structures, where the late adopters tend to lose all their money and the investors who get in early are the ones that make the money. So, ask yourself a simple question: If you don’t own Bitcoin or have not yet invested in cryptocurrency and you decide to buy today, are you an early adopter or are you coming to the ‘party’ quite late?
When a share goes up, many investors attribute it to their skill and when that same share goes down, they feel they were unlucky. Sometimes, luck, not skill can result in a windfall – which brings me to GameStop CEO, George Sherman. GameStop runs a network of stores that sell digital video discs. Nowadays, most players download games from the internet, so the business has a declining revenue stream and not much of a future.
Despite the company’s poor prospects, retail investors on the social media platform Reddit decided to drive the share price up. They were hell-bent on squeezing out hedge fund managers. The mass investors who got the short interest down to 20% from 120%, effectively allowed the CEO to be on the job for less than a year and walk off with more than $170 million. George Sherman is a very lucky man. The shares are trading at $160-odd,5 but we believe the company still isn’t worth more than $10. The GameStop saga is not over yet, and for many, it could all end in tears.
Over the long term, markets go up but not in a straight line. Balancing risk and return remains the cornerstone of successful investing. We continue to seek differentiated investment ideas to generate long-term wealth for our clients. There are no shortcuts when you want to achieve sustainable returns over time. We uncover good investment ideas by doing our homework and remaining disciplined investors. Many areas of the market look extended, but we continue to find compelling investment ideas for our portfolios.
1 Source: Ninety One and Bloomberg, 31 March 2007 to 26 May 2021.
2 Source: Bloomberg, All Bond Index and All Share Index, as at 30 June 2021.
3 Purchasing power parity compares different countries' currencies through a "basket of goods" approach (Investopedia).
4 www.99bitcoins.com July 2021.
5 30 July 2021.